Iranian oil sanctions: What will Tehran’s return to market mean for Russia?

Apr 09 2015

Alexander Kurdin

special to RBTH

Following the agreement reached between Iran and international mediators in Lausanne on April 2, political commentators and industry insiders are beginning to speculate on when oil sanctions against Tehran will be lifted and what effect this will have on the global oil market. But does Russia have anything to fear from the return of Iranian oil to the marketplace?

With relations between Iran and the world’s leading nations
set for a thaw in the wake of the landmark agreement reached in talks on
Tehran’s nuclear program in Switzerland last week, commentators are already
turning to speculation on when Western sanctions against Iran might be relaxed
and what the implications will be for global trade.

For the Russian economy the lifting of sanctions against
Iran could lead to significant adverse consequences, particularly for the oil
and gas industry. This will be primarily due not to direct competition with
Iranian oil, but rather to the impact of this situation on world prices.

A complex picture

The reduction in oil exports from Iran under the influence
of sanctions was not so large in absolute terms. The Iranians lost about 1
million barrels, or about 50 million tons, per day of oil exports due to the EU
and U.S. sanctions on Iranian oil imposed in 2012 and other restrictive
measures.

Half of those losses were caused by the refusal of European
countries to buy Iranian oil, another half by a decrease in purchases by Asian
consumers. The Asia-Pacific region was the main destination for Iranian oil
before the embargo (nearly 70 percent of sales), and it is even more so now
(about 95 percent of sales).

What is more, Asians cannot give up Iranian oil even under
sanctions, despite all their loyalty to the West. Oil demand in the
Asia-Pacific region has grown steadily, and it will easily be enough to absorb
additional supplies from both Iran and Russia.

In Europe, the situation is more complicated, but still,
given the volume of supplies of oil and petroleum products from Russia to
Europe (about 250 million tons per year), the largest Iranian supplies to the
market (about 25 million tons per year) will not provide significant
replacement potential.

In addition, it was not Russia that replaced the supply of Iranian
oil, but other Middle Eastern countries – Libya, Iraq and Saudi Arabia.
Accordingly, it is rather they that will have to worry, especially since it is
they that will need to maintain the total OPEC production quota.

On the whole, Iranian oil is comparable to Russian oil in
terms of costs of production – in both cases, the costs usually do not exceed
$20-25 per barrel. However, the Russian producers have now to develop
increasingly complex fields that push the price up to $30 per barrel or even
more.

Over time, this situation will become more complicated.
However, a more dangerous rival in this context appears to be Iraq, which has
much greater potential to increase production in the long run than most other
Middle Eastern countries, including Iran.

As for gas, Iran cannot yet be regarded as a rival to Russia,
since Tehran does not export the fuel, barring a small amount of supplies to
Turkey (less than 10 billion cubic meters per year) for local consumption.
Export projects exist, but are still in the early stages of development. For
this reason the EU embargo did not apply to gas supplies.

Influx of Iranian oil will maintain global oversupply

The risk of a fall in oil prices when Iranian sanctions are
lifted is indeed very real. Still, the reserves of oil and petroleum products
are now at high levels, and the world market is still oversupplied. According
to the International Energy Agency, oversupply could still be up to 0.5 million
barrels per day in 2015, although this surplus is expected to decrease or even
disappear by the end of the year.

However, an additional 1 million barrels per day on the
market, unless offset by a decrease in production in other OPEC countries, could
threaten this balancing of stocks. Over time, the world market will still get
rid of oversupply and surplus stocks under the influence of growth in
consumption, but the return of Iranian oil may delay this transition for
another year.

Meanwhile, the Russian economy has industries whose
representatives may be interested in the lifting of sanctions against Tehran.
Primarily, it is those that trade with Iran – exporters of grain, timber,
metals, certain types of machinery and equipment, as well as importers of fruit
and vegetables. The financial sanctions hinder trade and increase their costs.

Alexander Kurdin is Head
of Department for Strategic Studies in Energy at the Analytical Center for the
Government of the Russian Federation